L12 - Revenues and Profit Maximisation Flashcards
When is a seller a price taker?
If it can sell as much as it wants at a given price.
When is a buyer a price taker?
If it can buy as much as it wants at a given price
How do you calculate the %change in price?
% Change in quantity demanded/ PED
When is a seller a price maker?
If the amount it sells affects the market price
CAN CONTROL PRICE
When is a buyer a price maker?
If the amount it buys affects the market price
CAN CONTROL PRICE
What is Normal Profit?
The firm breaks even if it produces when TC=TR
What is Super Normal Profit?
The Firm’s total revenue is greater than its costs.
What is Average Revenue and how do you calculate it?
This is the amount that the firm earns per unit of output sold
AR= TR/Q
Where TR = PxQ
What is the Marginal Revenue and how do you calculate it?
This is the extra revenue of selling one more unit of output.
MR= Change in TR/ Change in Q
What is the demand curve when a firms is price taking?
The AR=MR Line is horizontal
When should a firm shut down? (SHUT DOWN RULE)
A firm will shut down if average variable costs larger than price.
p
When does a firm make super normal profit in the short run?
When p > ATC
What happens to a firm’s costs in the LR and when should it shut down?
In Long Run:
All factors are variable, so all costs are variable (there are no fixed costs)
p < LRAC (average total cost)
Meaning a firm only has to pay back its variable costs
How much should a firm produce? (MARGINAL OUTPUT RULE)
When MR=MC
If MR>MC, then producing an extra unit increases TR more than TC. Thus increasing profits.
Where is there profit maximisation in the SR?
Profits maximised at point MR=MC
SEE DIAGRAM
